Is Grant Thornton fit to audit FTSE companies?
Philip Fisher examines the latest dismal verdict on auditor competency and asks: what will make auditors toe the line?
Before people get too excited, this article is not intended as a witch hunt against what is now the UK’s sixth-largest firm of accountants.
Sadly, following the latest FRC annual report on the competency of auditors of FTSE 350 companies, there is a serious question about whether any of the firms in our profession is able to do this basic job to an acceptable level.
Grant Thornton makes the headlines because the practice’s statistics are even worse than those of its competitors. To compound the problem, the powers-that-be at the firm do not seem to learn from their mistakes.
Their cause is hardly helped by the high-profile failure of Patisserie Valerie, following audits that failed to identify endemic signs of impending disaster. There is also a question over the current Sports Direct audit, with an announcement delayed at the last minute.
The FRC reviews very small numbers of audits and requires the country’s top accountants to achieve at least a 90% success rate, graciously accepting audits that require limited improvements. Remarkably, none of those reviewed ever seems to achieve this target.
As has been suggested in this column before, the public should have a reasonable expectation that auditors will get it right 100% of the time, give or take the odd lapse that could give rise to a limited improvement.
When Grant Thornton is scoring at 50% (including 25% where significant improvement was required) and PwC 65%, something has gone seriously wrong. One might almost applaud KPMG for its massive improvement, were this not from a totally unacceptable 50% to 80%, which is still very poor.
It is always possible that the FRC uses measures that are unreasonable but, if that were the case, surely somebody would have cried foul by now?
Otherwise, the only conclusion any reasonable person can reach is that auditors do not do their jobs to the required level and, since this problem is repeated every year, do not seem concerned enough to take the necessary steps to remedy the position.
One can’t help but imagine what the situation would be if this kind of failure was achieved in other professions. If doctors killed or even failed to cure between 10% and 50% of their patients, you imagine that they would end up in jail.
When football managers underachieve to this extent, we know that they soon become ex-managers. Admittedly, they then become managers at other clubs having taken a couple of years’ pay from their misguided former employers for the privilege of doing so.
Indeed, the irony is that while the bad auditors suffer little more than minor opprobrium, the FRC is the one that has just got the sack, the government having decided it is not fit for purpose.
You have to conclude that when significant failure happens year after year, it is time for serious action.
The question now is what will make auditors toe the line? Perhaps if miscreants were banned from auditing large companies for a period, that might help?
Alternatively, maybe it is time for multi-million-pound fines or compensation payments each time an auditor is deemed responsible for an error that leaves stakeholders massively out of pocket?
We await the new watchdog's verdict with interest.